The Multinational Monitor


I N T E R N A T I O N A L   F I N A N C E

OPIC: A Far Cry from Development

A foreign aid program insures multinational investors against political risk. But who insures their investments will assist Third World development?

by William Goodfellow

Corporate strategists at Gulf Oil, Kimberly Clark and Chase Manhattan Bank confronted similar dilemmas last year. Gulf saw profits hidden beneath the Egyptian sands, Kimberly felt the time was right to step up production at its paper plant in El Salvador, and Chase was ready to expand its commercial banking activities in Thailand. In each country, however, the political climate posed serious risks to the company. The oil field was in the middle of a demilitarized zone, the Salvadorean regime's support is tissue-thin, and Thailand stands on the outskirts of Sino-Soviet crossfire.

The companies plunged ahead with $80 million of investments insured by the U.S. government against war, nationalization, and social upheaval. Insuring these investments may simply seem a particularly overt form of government aid to multinationals. But Congress established the Overseas Private Investment Corporation (OPIC) with a somewhat different aim: to promote the social and economic development of Third World countries.

Since its creation, OPIC has faced tough legislative battles. Congressional critics of OPIC variously fear that its operations promote the export of U.S. jobs, support the violation of human rights, and may actually harm-rather than aid-the development of Third World nations. These criticisms resurfaced most recently during June hearings to extend OPIC's authorization until 1985. U.S. Senator Jacob Javits (R-N.Y.), backed by OPIC president J. Bruce Llewellyn, has proposed legislation (S. 2186) that would free OPIC from existing constraints and direct it to promote U.S. trade as well as Third World development.' These changes are touted as a means to improve America's balance of payments and give OPIC greater flexibility.

Adding a trade-promotion aspect to OPIC may make it more palatable to a Congress increasingly resistant to foreign aid. But the new bill also underscores the contradiction between the spirit behind OPIC's creation and how the agency attempts to fulfill its original, mandate. OPIC's charter directs the agency to mobilize U.S. private capital to promote development. But OPIC has little leverage over potential investors, and the present board has even less desire to control where and how capital is to be employed; these critical decisions are made by multinationals whose interests may drastically diverge from the developmental needs of the country. By backing investments with the resources of the U.S. government, OPIC only serves to strengthen the hand of the many corporations who continue to bargain with host country governments after an investment is in place. And now, by allowing OPIC to insure existing investments, promote trade, and back projects in wealthier countries, the Javits bill would provide additional benefits to U.S. multinationals-all under the guise of development.

Although underwriting private investments is a relatively recent approach to promoting Third World development-OPIC was created in 1969 and began operations two years later-the U.S. government has been in the business of insuring multinationals since 1948. As part of the Marshall Plan, the government insured private investments against political risks to promote the reconstruction of Europe. Today, OPIC insures $3.2 billion of U.S. investments in less developed countries from losses caused by: (1) war, revolution or insurrection; (2) government takeovers without adequate compensation; (3) inability to return profits to the U.S. because of changes in exchange controls. In addition, OPIC provides outright financing for a few projects each year. The agency has its own reserve fund and has been able to sustain itself from the premiums it collects, although its insurance reserves are considered inadequate by the U.S. General Accounting Office. OPIC, however, can operate in an area where private insurance companies fear to tread because its policies are backed by the full faith and credit of the U.S. Treasury. Ultimately, U.S. taxpayers shoulder the risk of the OPIC portfolio.

OPIC's short but controversial history illustrates the conflicts inherent in an agency that tries to promote development by subsidizing multinationals.

Among other objectives, OPIC must "encourage investments which will ... lessen dependence on imports." But there is little evidence that OPIC favors those investments most likely to integrate well into local industry and help the host country achieve self-sufficiency. Reacting to persistent union complaints that OPIC's projects export U.S. jobs, agency administrators recently argued that 60 percent of the initial inputs for OPIC projects are imported from the U.S. OPIC projects depend heavily on American imports, not because the program is tailored to improving the U.S. trade balance, but because the multinationals it serves have no incentive to stimulate local industry. The Javits bill further encourages OPIC to insure investments that increase dependency on U.S. exports.

OPIC has also followed the multinationals in concentrating on countries best able to attract foreign investment rather than those most in need. In April, 1978 Congress required OPIC to "restrict its activities with respect to investment projects in less developed countries that have per capita incomes of $1,000 or more in 1975 United States dollars." Despite the intent of this loosely worded law, during 1978 and 1979 OPIC issued 60.6 percent of its new coverage in just seven countries: Panama, Saudi Arabia, Israel, South Korea, Brazil, Egypt, and El Salvador. Only two of these countries, El Salvador and Egypt, had per capita incomes less than the $1,000 cap. The Javits bill would completely eliminate the income ceiling. Assistant Secretary of the Treasury C. Fred Bergsten testified at the recent Senate hearings that "the more advanced of the developing countries have no trouble attracting foreign investment to support their own national economic and developmental objectives." Bergsten added that "the main effect of eliminating the [income] limit would be to bless OPIC going in OPEC countries."

The fundamental question, however, is whether OPIC advances the cause of national development even when it operates in the poorest, less-developed countries. Although OPIC is required to report to Congress "the extent to which the operations of the corporation complement or are compatible with the development assistance programs of the United States and other donors," there is very little coordination between OPIC and agencies that are empowered to initiate development projects. While some OPIC-insured investments do make a contribution to development, others merely cater to local and foreign elites, distorting national priorities.

It takes imagination to find the developmental benefits flowing from some OPIC projects. Past investments include a mink breeding farm in South Korea, Avis rent-a-car and chauffeur services in Malaysia, ITT and TWA safari lodges in Kenya, Sheraton hotels in India, Brazil and Tunisia, and Brinks armored car service in Liberia. One resort that OPIC helped with both insurance and a loan is Habitation Leclerc, which Town and Country called "a Haitian hideaway playground to satisfy bored internationals." A hotel of this kind can be almost completely isolated from the rest of the economy in a country where the annual average income falls short of the nightly room rent. Travel and Leisure noted that Habitation is "self-contained"-"the Leclerc estate itself is separated from the raffish area surrounding it by a high wall and, once within that compound, a different world exists.* For the Haitians who live outside the high wall, this resort offers little more than a few jobs as cooks and servants and a new spot for beggars to congregate,

That the benefits of nearly any foreign investment will trickle down to reach the poor seems a basic assumption underlying OPIC's operations. But the experience of many countries with multinationals undermines this premise. Brazil has received more commercial bank loans and foreign investment than any other country in the Third World. Between 1974 and 1976 OPIC issued more insurance in Brazil than anywhere else. Despite the fact that the per capita income in Brazil is well over OPIC's $1000 guideline, Brazil still ranked fifth on the list last year. While Brazil's average income is high for a Third World country, the income distribution is grossly uneven. Fortythree million Brazilians live on no more than $250 a year, and northeast Brazil is one of the most impoverished regions in Latin America. Multinational industry flourishes in Brazil without significantly helping the nation's poor.

The prime beneficiaries of OPIC insurance are the largest U.S. corporations. Of the ten companies with the most OPIC insurance during fiscal years 1978 and 1979, all but one had annual sales in excess of $1.4 billion. The Chase Manhattan Bank topped the list, followed by such giants as Gulf Oil, General Electric, Motorola and Occidental Petroleum's Hooker Chemical, famed for Love Canal.

The large share of OPIC policies going to huge corporations raises further questions about the necessity of the program. The majority of the insured companies are capable themselves of absorbing losses now guaranteed by the U.S. government, and should be able to develop risk management plans of their own design. They would undoubtedly continue to invest abroad with or without OPIC.

Some of OPIC's drawbacks would be diminished if the agency were to focus its energies on small business. Small businesses are generally more adaptive in developing technologies and work processes appropriate to Third World economies. At the same time. they arc less likely to meddle in the internal affairs of a host country.

In 1978 Congress passed a requirement that at least 30 percent of OPIC's projects be carried out b} small business. Since then, OPIC has promoted small business involvement at conferences around the country and has made a few noteworthy efforts to bring appropriate technology to small countries in the Caribbean and other areas. Nevertheless, a majority of the companies using OPIC are still among the nation's largest. During fiscal years 1978 and 1979, OPIC issued 87 percent of its new insurance coverage to Fortune 1000-sized companies. while only 13 percent went to what OPIC defines as small business. `

The various congressional attempts to reform OPIC-particularly directing it to the poorest countries and emphasizing small business-stand in sharp contrast with the current Javits bill. Besides removing the income limit and adding a trade promotion aspect, the bill would allow the agency to insure existing investments. Although this could greatly enlarge OPIC's insurance portfolio and world-wide exposure, the benefits would accrue exclusively to OPIC's corporate customers, for there, is no requirement that a new policy for an existing investment promote either host-country development or U.S. exports.

The Javits bill and president Llewellyn's public statements in support of the legislation, indicate that OPIC is seeking to establish greater independence to business. But the bill is also symptomatic of the political cross-currents that have long buffeted OPIC. The agency is caught between the demands of those who want the U.S. to promote Third World development and those who wish to boost the international position of American business. OPIC's existence confuses the debate, embodying the notion that the interests of multinationals and developing countries are ordinarily complementary.

Rather than increase its freedom to underwrite U.S. business abroad, Congress should dissolve OPIC and reallocate its functions. A development administration should handle its development functions, not the current business-dominated board. If Congress wishes to promote exports or overseas investments, it should transfer OPIC's operations in these areas to Export-Import Bank. Disguising OPIC as a development agency rather than as a subsidy for multinational corporations deceives both American taxpayers and the poor of the Third World.

William Goodfellow is deputy director of the Center for International Policy, a Washington-based research and lobbying group concerned with U.S.- Third World relations.

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